SACRAMENTO  About 2,000 small business owners and investors across California are being forced to retroactively pay the state four years of assessments totaling $120 million plus interest, based on a decision by the Franchise Tax Board.

In December, the state agency that administers personal income and corporate taxes ended a nearly 20-year-old tax incentive designed to spur investment in startup companies and small businesses, citing a court ruling. The benefit allowed small business investors who sold their stock at a gain to exclude half the profits from their income taxes.

Bruce Hansen, who cofounded ID Analytics in San Diego and led the company as chairman and chief executive until its sale to LifeLock for $195 million in 2012, said the biggest heartache was discovering that the state was changing the rules dating back several years. It’s a decision that he says will cost him several hundred thousand dollars.

“I don’t mind paying taxes,” Hansen said. “But California has just gone over the top. This is no way to do business in my mind.”

The agency decision is estimated to affect about 500 small business owners and shareholders for taxes to be paid this year and each of the past four years. The estimate of $120 million plus $8 million in interest only covers the four past years, as taxes this year are not due until April.

The decision was made at the staff level, not by the three members of the Franchise Tax Board — John Chiang, state controller; Jerome E. Horton, chairman of the Board of Equalization and Ana Matosantos, state finance director.

The central issue is that a legislative policy decision was found unconstitutional, and the Legislature must determine the next course of action, said Jacob Roper, a spokesman for Chiang, chairman of the tax board.

“In the meantime, the controller can sympathize with any taxpayer who faces shifting rules and applications of the law,” Roper said. “Complex and changing tax rules add to a taxpayer’s burden, and this is just one reason the controller thinks a broad tax reform package is overdue.”

The court case at issue was brought against the Franchise Tax Board by Frank Cutler. Cutler sought to take advantage of the tax break but was denied because the law only gave that consideration to small businesses with 80 percent of assets and payroll in California. The Second District Court of Appeal held that the statute violated the commerce clause of the U.S. Constitution because it discriminated against out of state businesses.

The Franchise Tax Board says it had little choice but to invalidate the exclusion after the August ruling.

“In treating all taxpayers the same — because the statute is now null and void — we are issuing tax assessments for the open years saying you can’t have this exclusion,” spokeswoman Denise Azimi said.

Marty Dakessian, an attorney representing Cutler, questioned why the tax board’s decision to seek back assessments from investors was made at the staff level rather than by tax board members or elected lawmakers. He said the financial incentives to small businesses are critical as the state works its way through the economic recovery.